Create your Serendipity as an investor

Many of us downplay the role of “luck”, “chance”, “karma” in our careers, our investing, our personal lives.

Where there is choice, there can be conflict created by the choices. To invest now when the Nifty is at all time highs or not to invest, to marry this person or not to marry…to quit this great job and go for my own start up or not to….And there is a choice in everything.

Now, while we all have a free will and an intellect to discriminate and take calculated risks and go ahead with a decision, there are hundreds of factors our intellects cannot see or consider in any deliberation. Yet we go ahead with a course of action. What differentiates a calculated risk from a wild risk is this deliberation. Yet, there is risk, always, of not getting a desired outcome.

Often, we see that our planned course of action, our investment succeeds and sometimes there is wild success, despite hundreds of things we could not see while deliberating. Wise folk recognize the role played by “luck”/“chance”/ “karma”.

I recently heard a very interesting conversation between two brilliant and successful men – Mr. V Shankar, Founder CAMS and Mr. G V Ravishankar, Managing Director at Sequoia Capital, in which Mr. VS asked Mr. GVR to speak about something the latter had written in the context of venture capital investing – “Create your Serendipity”. (Serendipity is translated as Chance, Fate, Destiny, Luck). In short – how to create conditions favourable for you to get lucky!!!

The response from a very successful man struck me and was insightful and in short was as below:

Depending solely on chance for success to come in your choices is like trying to win a lottery. One can create the conditions for Lady Luck to visit and one can “manage serendipity”. This is said in the context of his VC business.

1. Be there, always. Be committed, have passion and be there to take decisions.
2. Make yourself heard – to let potential entrepreneurs know that you are there to evaluate a venture of theirs. Let folk know what you do and that you are there.
3. Give time! You cannot be impatient. Give time for the seed to become a tree.

When all the three are there, the chances of success are higher.

Now, let’s look at this in the context of investing – to get financial freedom.

All investing is forecasting. We want a particular outcome but there are hundreds of factors we cannot see. 2020 is a great example of things turning upside down and life being disrupted in a way we did not think possible. So, how does one create conditions favourable for success in reaching financial goals and getting success in investing.

My take:

1    Be committed. 

     Be committed to a savings plan, to sticking to your process and staying the course. I have seen that those who impulsively deviate from their planned investing process, allocation invariably get a sub optimal result. Have seen actual instances of folk impulsively sell off in March at the lowest of low points and disturb their equity allocation, instead of following process. Just sticking on would have meant being in gains now. One did not know how the future would unfold but deviations from asset allocation hurt. Those who stuck to their SIPs, were there (Be there- be committed) have gained. Those who stuck to allocation and moved funds into equity did even better and created their serendipity. One may say that this is said in hindsight, but do check out previous instances in your own investing lives and note them down.

2.       Be open: Be open-minded to:

• Check out all products and not derisively dismiss anything. I find folk on twitter dismissing various products just because they are from AMCs. You alone lose if you do not know about a product and way it can help you. I have been served through out life by making an attempt to get insights about how various investment instruments work.

• Seek advice if you think you will be better served along your journey with advice. Obstinate refusal to take help will keep you away from learning much and gaining much.

3.       Give time: Be patient:

Results take time to fructify. Patience is required to sit out volatility. Patience is required to allow time for the investment to give results. Patience would mean you are invested in that one good year which will make a big difference to your investment outcome.

 I'm never tired of looking at this graph of the Nifty in 2020. Serendipity through patience, in a graph :)

NIFTY 50 YEAR TO DATE

So, if you are committed, you are open-minded and patient, you will often be creating your serendipity. Do save this, try it and in time let me know how Lady Luck has blessed you. Follow me on twitter.

DISCLAIMERS:

I am an AMFI-Registered Mutual Fund Distributor.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY BEFORE INVESTING

RETAIN YOUR OBJECTIVITY - IN LIFE AND INVESTING

As a young school kid in primary school I would look towards the high school section, see bigger guys, and wait to grow up and “be like them”. As an executive in a company you want to grow to be a manager. As a manager, one wants to get into higher management. A businessman wants to increase turnover and profits.  All these are different examples for only ONE thing – the universal human need to grow, expand and feel full and complete.

Wanting to grow, expand and feel full is human nature.

Now come to the world of personal finance and investing. Fitwit has many people people speaking only about themselves, their investments and their success and it is but natural for beginners, newbies and many investors to “be like them” – to grow, get rich, feel complete and successful. For every investor, the means to expand, grow, feel full is to follow a path that takes them to such success. This strong desire to FEEL FULL and NOT FEEL SMALL - is the root of action of every individual.

I am discussing investors and their behaviour. While wanting to be full and complete is natural, what harms is the strong desire to do it fast. This leads to the dulling of discriminative ability.

Think about it – all greed, instinctive decisions, stupid allocation is the result of this wanting to grow fast, quickly. And… the worst thing to happen is to do it by:

• Reading clickbait headlines
• Taking tips, free advice from various media
• Listening to fake folklore of office colleagues, cousins
• Blindly following authoritative figures.

 As an objective individual, it is easy to call out nonsense, but…. this need to grow fast and feel full takes over and we simply lose all objectivity.

 A true story.

 Three years ago, an entrepreneur running an SME came to me to onboard and I discussed with him a scheme of allocation, keeping the overheated market in mind. He pooh poohed the allocation showing data of recent returns of small caps and of individuals on twitter. Disagreeing with his utter disregard of advice and with his misallocation, I did not onboard him and he put directly a large sum in 100% equity, heavily tilted toward mid and small cap funds. We all know what happened since 2017. Greed, fuelled by a desire to be successful, to get rich soon, led him to lose objectivity and to ignore warnings of mis allocation. The story continues…the same investor redeemed everything at a low in March 2020, losing very heavily and has come back for help on asset allocation.

 While one can feel sorry for such misfortune, the one take away we can have from all this – We all want to grow. But growth requires time and the ability to filter out the bulls**t from the truth and choose rightly. In Sanskrit the word Viveka is used for ability to discriminate – crap from reality. Viveka also means you know when you can use help, advice rather than getting it free from gyan. Use this discriminative power and it will help you as an investor and through out life.

 

MUTUAL FUNDS ARE SUBJECT TO MARKET RISK. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY BEFORE INVESTING.

DISCLAIMER: I AM A MUTUAL FUND DISTIRBUTOR

 

 

 

 

 

 

  

Working - How a Debt Fund beats a fixed deposit post tax

I have received many requests to give a working of how Bond Funds beat fixed deposits post tax. When you invest in an FD, you pay tax at your tax slab which could be 30%. However investors in bond funds get the benefit of indexing the cost and a reduced rate of 20% tax which significantly reduces tax burden.

Assumptions in the sample below:

1. Investment has to be for 3 years for indexation benefits for bond fund

2. Cost inflation index growth at 5% which is very reasonable considering the rate of inflation

3. 7.25% returns for both

Even with the same returns, the net gain at the end of 3 years is substantial if one had invested in bond funds

Mutual Fund investments are subject to market risk. Please read all scheme related documents carefully.

Connect with me at maheshmirpuri@yahoo.com to learn more about mutual funds.

On the markets today - The focus is on who you are

On the markets today - The focus is on who you are. A great series of tweets by Deepak Shenoy

How stock markets work :)

This is how stock markets function 😀 .@Mldigital .@mobis_philipose .@invest_mutual .@menakadoshi .@investor_first pic.twitter.com/y7plEOEfDD

— pd (@iGalactus) July 15, 2015

When do we book profits, sell equity?

Many who had bought equities and invested in equity funds in 2007 -08 and subsequently being disillusioned, have recently sold/redeemed or are confused as to whether to sell now. They have waited for a long time to recover their losses. Now that there is profit, they want to quit. In fact some of them had started redeeming equity funds from Sep. 2013!! Those who entered the market in recent times did not expect such a run-up and do not want to make the mistake of not cashing out in time. Therefore, the question - Do we sell now? Do we book profits?

Unpredictable:

Note, no "expert" can ever really know the top of a bull market - is the Sensex going to be 40000 by 2020 or will it be more?  Markets will ALWAYS remain unpredictable. What worked in the past may not work now in a different situation. In fact, we tend to look at markets that have run up in terms of how much they can fall!!. 

Simple rules may not work:

Many have rules of profit booking, to book out when a certain 'special' level has been reached. Such decisions may all prove incorrect and one may miss a large part of the bull run that happens after exit and leave us regretting. 

Investors also rightly worry about getting greedy. For those burnt badly in a bear market, the predominant thought is caution. Investors recall how they failed to get out at earlier highs and paid heavily for it. They get their daily dose of gyan from TV. The inherent unpredictability of markets make 'expert' recommendations ridiculous at times!!

Since we can never predict when that unknown torpedo will come out of the dark and smash the price of the stocks we hold, the question is: what do we do to build wealth systematically, attain goals and at the same time reduce risks?

Asset allocation and re-balancing as a way to systematically book profits:

Note - An investor, who is booking profits, is actually taking money out of equity, thus reducing exposure to equity. This really is an asset allocation decision. Each time money is moved in and out of equity markets, the investor is not 'booking profits' but re-balancing his money. What is this re-balancing?

First, one has to decide how much money one needs to have in equity based on what returns they need, the risk they can bear and when the funds would be required. Therefore, first, goals and the period should be very clear. An investor who plans to fund his own retirement after 20 years may want a higher proportion of his money in equities to allow time for growth and to beat inflation; similarly to fund your child's education 12-15 years later, you may decide to have a higher allocation in equity to beat inflation in education costs.

Based on our risk profile and goals we decide as to how much to invest in equity and how much in debt. In equity we include shares, equity mutual funds and we include fixed deposits, NCDs, bond funds, PPF in debt. (Investors can even include other asset classes like gold etc)

Let us say we have deliberately decided to have a 60-40 equity-debt ratio allocation. This allocation ratio is our strategic allocation, and is the most crucial decision one can make. Rebalancing is the deliberate, periodic realigning of a portfolio of investments to bring it back to the original target asset allocation. This way we systematically capture returns "book profits" - and reduce unintended risks created by over-exposure to one category. We do not bother about timing markets or worry too much on which way the markets would go. So, when markets go up and our equity valuation rises, we are automatically "booking profits" to bring back the ratio to 60-40 and reducing the risk of higher exposure to equity. Irrespective of where the market is, 60% of our money needs to be in equities..

An example would help us understand re-balancing:

Let us say an investor has decided to have a 60-40 ratio and has invested Rs. 60000 in Equity Mutual Funds and Rs. 40000.00 in Debt – comprising of FDs, Debt Funds etc. on January 01, 2015. 

Assuming the debt portion is worth 44000.00 on Dec 31, 2015. Let us assume that the market was good and the equity portion has gone up to 120000.00. This would mean that the equity to debt ratio in the portfolio is 73-27 , which would mean a higher exposure(73%) to risky equity. Now after taking stock, the investor should reduce exposure in equity (redeem funds - sell equity, in other words, book profits) and invest in debt to bring back the ratio to 60-40.

If however, equity component has gone down, then one should reduce debt and invest in equity to bring the balance back. 

This way not only you know how much to 'book' but you don't really care where the market is when you book profits. Following this gives you a freedom and takes out the confusion from investing.  Moreover, your focus is not on what others are doing, but on your own portfolio. 

So how does one go about this?

For a start 

• Evaluate your current portfolio
• Decide the allocation as per your risk-taking ability. You may take assistance in this from a financial planner. 
• It will be difficult to make an exact ratio and you may allow yourself a small gap -for e.g. equity may go between 57% to 63%
• The equity allocation can be increased to reach the desired level slowly, by means of SIPs. 
• Follow a policy of checking and re-balancing every 6 months - even a yearly review will be fine i.e moving assets to maintain the proportion

Re-balancing forces you to base your investment decisions on a simple, objective standard - Do I now own more of an asset than my plan call for.

Follow this and be relatively free from the emotional upheavals that market movements cause.

For those who still want to take a call - Look for potential downside

Those who still need to take a call may check market valuations (read this post) and see where the market stands today. The point to note is to look for how much downside could be there. 

When one sees too many IPOs at super high prices and  when every one and his uncle is bullish is a sure signal that it may be time to book some profits to reduce the equity proportion in your portfolio. This approach means looking for signs of a crack up. 

Market emotions cycle

Note: Investors can take the assistance of a financial planner to come to asset-allocation decisions.

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Figure out your life before you figure out your investments

I am regularly asked - "Should I invest in equity now?"

There is no straightforward response to this question. Many factors have to be considered - the chief being - Do you know where you want to go? When do you have to reach there? Do you know where you are? Are these well-defined. Once you have a goal - a clear well defined goal, you will yourself have a hint on how to get there - i.e where you should invest. 

Three factors to consider while investing for your goals are Risk, Return and Liquidity

1. Risk: The chance that an investment's actual return will be different from what is expected. It also includes the possibility that you will lose a part of your capital / investment. For example, if you invest in equity shares today and need the money for your daughter's wedding next year, it is silly to invest in stocks today hoping to make a gain!!   The risk of loss is high. The return is not known to you. This is risk.

2. Return: This refers to the gain (or loss) from an investment. An investment is made for returns / gains and we only invest to get returns. However, a point to be noted that the higher the risk, the higher the potential for returns. For example, bank deposits are relatively risk-free. We know that currently we will get a return of about 9% p.a . The returns from stocks is unknown. There is risk, but gains can be high. The stock markets have already given > 25% returns this year!! Gold gave great returns from 2009 - 2013.

3. Liquidity: This is the ability to convert an asset into cash quickly i.e in simple language, the ease of selling of the investment/ asset to get cash. If you have to invest money now for paying your kid's college fees in about 3 -4 years, you would not invest in real estate. It is not easy to dispose off for cash. Whereas, bank deposits, mutual funds can easily and without much cost be liquidated.

Everything you invest in is going to require a sacrifice in one of these areas. If you want high liquidity and low risk, you’re going to have a low return. You’re probably going to be putting your money into something like a fixed deposit. An investment in real estate / property means lower liquidity, but could mean higher risk and returns. If you want high liquidity and high return, you’re going to have to take on some significant risk. You’re probably going to be putting your money into something like stocks and equity mutual funds.

There are different life situations that call for different investment options. So it basically depends on your goals in which your investment time horizon is intrinsic. The longer the time horizon, the more risk you can take and even sacrifice liquidity.

Equity mutual funds / Stocks have given a great return when the investment horizon has been for periods over ten years! For many people, it makes sense to invest in equity funds / stocks for the ease of rebalancing and selling them off in case they should need the money. (more on rebalancing investments later)

Remember that it is your goals and your life that is the key. The situation that you are in and what you need out of the investment will decide where you must invest - a bank deposit or gold or equity.

Without a plan, a goal for yourself, you will only invest at random, or worse still be carried away by advertisements, that neighborhood uncle who sells 'great' policies and will be stuck in illiquid, sub-optimal investments or worse still, face a severe loss.

Figure out your life before you figure out your investments. Know your goals first. The right investment becomes clearer.

SEBI Board approves REIT regulations - A Primer on REITs

  

The SEBI Board has cleared the final guidelines for setting up REITs. Announcing the final guidelines for REITs, SEBI has set the ball rolling for product manufacturers to launch their product to be subscribed by investors with a minimum investment of Rs 2 lakh.

While the concept of REITs been in existence in developed markets for several years now, it is a new concept in India and investors need to know what it is and how it works before they invest in them.

What are REITs

They are investment trusts that operate much like mutual funds. While mutual funds invest in equities, debt instruments, REITs invest in real estate. So then, REITs pool money from investors and invest the same in real estate. For investors who wish to allocate money to real estate, this is an option as one can own a piece of a prime / income generating property for a modest sum. Otherwise, an investment in developed property  is difficult for small investors.

REITs, as per the guidelines, should invest primarily in income generating real estate assets — commercial or residential and thereby look to generate regular return for investors.  The regulations aim to make investment in real estate through REITs less risky as investments are in developed properties that provide regular income.

REITs abroad are a popular investment option for long term pools of capital such as pension funds and insurance companies due to the regular stream of income which helps them in managing regular outflow to their investors.

The Proposed Framework in regulations

1. REITs will be set up as a Trust (similar to mutual funds)  and will have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer with specific responsibilities.

2. After the registration, the REIT would raise funds through an initial offer from investors and get listed. The minimum issue size of the initial offer to the public has been specified at Rs 250 crore and the regulator has specified that the size of assets under the REITs should not be less than Rs 500 crore.

3. The regulator has said that till the market develops, the units of REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size has been kept at Rs 2 lakh

4. The units offered to the public in initial offer shall not be less than 25% of the number of units of the REIT on post-issue basis

5 .Units of REITs shall be mandatorily listed on a recognized Stock Exchange and the REIT shall make continuous disclosures in terms of the listing agreement. Trading lot for such units on stock exchanges shall be Rs 1 Lakh.

6. In India REITs will invest in commercial real estate assets, either directly or through Special Purpose Vehicles (SPVs). In such SPVs a REIT shall hold controlling interest and not less than 50 per cent of the equity share capital or interest.

7. Not less than 80% of the value of the REIT assets shall be in completed and revenue generating properties. Not more than 20% of the value of REIT assets shall be invested in following :

i.                      developmental properties( restricted to 10% of the value of REIT assets),

ii.                     mortgage backed securities,

iii.                   listed/ unlisted debt of companies/body corporates in real estate sector,

iv.                   equity shares of companies listed on a recognized stock exchange in India which derive not less than 75% of their operating income from Real Estate activity,

v.                    government securities,

vi.                   money market instruments or Cash equivalents.

8. A REIT should invest in at least 2 projects with not more than 60% of value of assets invested in one project and should  distribute not less than 90% of the net distributable cash flows, to its investors, at least on a  half yearly basis.

9. REITs, through  valuers, should undertake full valuation on a yearly basis and update the same on a half yearly basis and declare NAV within 15 days from the date of such valuation/updation.

Read the details of the SEBI Board meeting here.

     

First Baby Steps in Investing

You are a working professional and have started your career. Early earnings have been spent buying that iphone, ipad, those special running shoes and in a holiday to Malaysia with friends. But at the back of your mind an alarm starts to ring! 

There is the thought, “I must plan for the future, save and build my assets. But… where do I start… What can I do with the few grand that remains at the end of the month?"

Your initial steps now would go thus:

First you require a PAN. In all probability you already have a PAN which you have submitted to your employers. Here's where you can apply if you do not have one. It is a simple process.

Second, make sure you get yourself KYC Compliant to apply in mutual funds. KYC compliance is necessary to apply in any Fund.

Third, open a demat account with a Depository Participant. It’s not too difficult. Many banks offer the service and check with your banker if you can open a demat account. Having an account is essential to purchase debentures, tax savings bonds and later equity shares.

How much to set aside:

Financial planners recommend setting aside a minimum of 10 to 15 % of your gross income to save or invest systematically at regular intervals for the future.  A systematic investment plan (SIP) in a mutual fund is recommended to start your investing life. SIP is a plan where an investor makes regular, equal payments into a mutual fund. The advantage of an SIP is that you can set aside small amounts – the few grand remaining - to suit your convenience.

Power of compounding:

Check out This SIP Calculator . Even Rs 3000.00 set aside every month from the start of your career for 30 years will amount to > Rs. 1 Crore at a reasonable 12%. Save Rs. 10000 and the amount is 3.5 Crore. Start now!!

Mutual Funds:

Do take the help of a financial advisor and assess your risk profile and decide what percentage of your savings you wish to put in Mutual Funds representing equity and what percentage in FDs etc. representing debt. Having understood what a mutual fund is, you know that investing via an SIP is the best method to avoid timing the market and have a disciplined approach to investing and you can start with small amounts.

You may consider starting with about 3 schemes in different funds.  So, if you are investing Rs 6,000 a month, invest Rs 2,000 each into three different schemes. You could start with one Large cap Equity Scheme, one Multi-cap Equity Scheme and one Balanced Fund.

Even while taking the help of an advisor, it would be good for you to track and check fund performance and reviews. Some websites you can go to for reference on Fund performance are - Mint 50 , Money Control, Value Research. There are many more which offer useful data and review.

While filling in the forms, use the auto-debit option for direct debit of your bank account. This way, the amount is automatically deducted at the beginning of the month itself, preventing you from overdrawing!!! Look here for Hints for filling SIP forms.

Small Saving Schemes:

Investing PPF is a must for tax benefits – Read this comprehensive piece for knowledge on investments in the Small Savings Schemes - Small Savings - Big Benefits

Bank Deposits:

See this article in the Business Line on The Best FD Rates for knowledge of the rates now.

Great!! You’ve now taken your first steps to invest in a financially secure future. Do remember to monitor your investments regularly.

Follow me on Twitter @invest_mutual .